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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1998,
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________ to
_________________
COMMISSION FILE NUMBER 0-12943
CYPRESS BIOSCIENCE, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 22-2389839
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4350 EXECUTIVE DRIVE, SUITE 325, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (zip code)
(619) 452-2323
(Registrant's telephone number including area code)
----------------------------------
Indicate by check (X) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
AT NOVEMBER 3, 1998, 39,457,397 SHARES OF COMMON STOCK OF THE
REGISTRANT WERE OUTSTANDING.
This filing, without exhibits, contains 17 pages.
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TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Balance Sheets as of
September 30, 1998 (unaudited) and December 31, 1997 ......................... 3
Condensed Consolidated Statements of Operations for the quarter
and nine months ended September 30, 1998 and 1997 (unaudited)................. 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 (unaudited)..................... 5
Notes to Condensed Consolidated Financial Statements ............................ 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 9
Item 3 - Risk Factors...................................................................... 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings ................................................................ 16
Item 6 - Exhibits and Reports on Form 8-K ................................................. 16
Signatures ................................................................................ 17
</TABLE>
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CYPRESS BIOSCIENCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
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(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,693,947 $ 7,541,320
Short-term investments 1,000,900 974,333
Accounts receivable:
Trade 298,402 372,741
Other 139,108 140,487
Inventories 841,417 628,004
Prepaid expenses 257,827 114,382
------------ ------------
Total current assets 9,231,601 9,771,267
Property and equipment, net 1,806,930 1,991,777
Restricted cash 35,000 --
Convertible debenture issuance costs, net 19,898 25,722
------------ ------------
Total assets $ 11,093,429 $ 11,788,766
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 599,669 $ 530,132
Accrued compensation 177,158 175,929
Accrued liabilities 1,051,992 1,144,692
Current portion of capital lease obligations 9,695 4,286
------------ ------------
Total current liabilities 1,838,514 1,855,039
Convertible debentures 400,000 400,000
Notes payable 144,804 --
Capital lease obligations, net of current portion 24,001 7,735
Commitments and contingencies
Stockholders' equity:
Common stock, $.02 par value; authorized 60,000,000 shares;
issued and outstanding, 39,430,116 shares at September 30,
1998 and 38,545,808 shares at December 31, 1997, respectively 788,602 770,916
Series A convertible preferred stock, $.02 par value; authorized
3,333,333 shares; issued and outstanding, 3,063,561 as of
September 30, 1998 61,271 --
Additional paid-in capital 86,032,635 78,041,636
Deferred compensation (369,103) (504,315)
Accumulated deficit (77,827,295) (68,782,245)
------------ ------------
Total stockholders' equity 8,686,110 9,525,992
------------ ------------
Total liabilities and stockholders' equity $ 11,093,429 $ 11,788,766
============ ============
</TABLE>
See accompanying notes.
Note: The balance sheet at December 31, 1997, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles.
3
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CYPRESS BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Product sales $ 603,060 $ 658,335 $ 1,592,830 $ 2,207,631
Grant income 38,542 85,293 242,777 179,197
------------ ------------ ------------ ------------
641,602 743,628 1,835,607 2,386,828
------------ ------------ ------------ ------------
Costs and expenses:
Production costs 628,202 354,024 1,398,390 1,316,045
Sales and marketing 811,431 262,754 1,563,992 1,015,696
Research and development 824,585 1,844,672 3,521,900 5,430,987
General and administrative 719,443 1,095,729 2,538,477 2,300,604
------------ ------------ ------------ ------------
2,983,661 3,557,179 9,022,759 10,063,332
------------ ------------ ------------ ------------
Loss from operations (2,342,059) (2,813,551) (7,187,152) (7,676,504)
Other income (expense):
Interest income 60,144 91,021 248,484 296,186
Interest expense (12,116) (7,813) (27,951) (24,088)
------------ ------------ ------------ ------------
48,028 83,208 220,533 272,098
------------ ------------ ------------ ------------
Net loss (2,294,031) (2,730,343) (6,966,619) (7,404,406)
Undeclared, imputed dividend on
Preferred Stock (2,078,431) -- (2,078,431) --
------------ ------------ ------------ ------------
Net loss applicable to common
shareholders $ (4,372,462) $ (2,730,343) $ (9,045,050) $ (7,404,406)
============ ============ ============ ============
Basic and diluted net loss
per common share $ (0.11) $ (0.08) $ (0.23) $ (0.21)
============ ============ ============ ============
Shares used in computing
net loss per share 39,265,768 34,630,850 38,961,261 34,592,569
============ ============ ============ ============
</TABLE>
See accompanying notes.
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CYPRESS BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
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OPERATING ACTIVITIES
Net loss $(6,966,619) $(7,404,406)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 426,549 352,482
Amortization of deferred compensation 330,081 542,970
Loss (gain) on disposal of property and equipment (6,610) 1,094
Common stock issued to 401(k) plan 109,206 88,597
Changes in operating assets and liabilities, net (303,075) 39,562
----------- -----------
Net cash used by operating activities (6,410,468) (6,379,701)
INVESTING ACTIVITIES
Purchase of equipment (236,768) (105,630)
Proceeds from sale of fixed assets 7,500 3,185
Restricted cash, net (35,000) --
Short-term investments, net (26,567) 967,084
----------- -----------
Net cash provided by (used by) investing activities (290,835) 864,639
FINANCING ACTIVITIES
Net proceeds from issuance of common stock -- 37,500
Net proceeds from issuance of Series A convertible
preferred stock 4,282,332 --
Proceeds from (payment of) notes payable and
capital lease obligation 166,479 (23,748)
Net proceeds from exercise of stock options and warrants 1,405,119 --
----------- -----------
Net cash provided by financing activities 5,853,930 13,752
Decrease in cash and cash equivalents (847,373) (5,501,310)
Cash and cash equivalents at beginning of period 7,541,320 8,045,508
----------- -----------
Cash and cash equivalents at end of period $ 6,693,947 $ 2,544,198
=========== ===========
</TABLE>
See accompanying notes.
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CYPRESS BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying consolidated financial statements have been prepared
by Cypress Bioscience, Inc. (the "Company") without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC"), as
outlined in the instructions to Form 10-Q and Article 10 of Regulation S-X.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the SEC.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated. In the opinion of the Company's management, all adjustments
necessary for a fair presentation of the accompanying unaudited financial
statements are reflected herein. All such adjustments are normal and recurring
in nature. Interim results are not necessarily indicative of results for the
full year. For more complete financial information, these consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements included in the Company's 1997 Annual Report on Form 10-K filed with
the SEC.
1. FORMATION AND BUSINESS OF THE COMPANY
The Company researches, develops, manufactures and markets medical
devices and therapeutics for the treatment of certain types of immune system
disorders and is engaged in the development of novel therapeutic agents for the
treatment of blood platelet disorders. The Company's first product, the
Prosorba(R) column, a medical device, treats a patient's defective immune system
so that it can more effectively respond to certain diseases. The Company
received marketing approval from the U.S. Food and Drug Administration ("FDA")
in December 1987 to distribute the Prosorba column for the treatment of
idiopathic thrombocytopenic purpura ("ITP"), an immune-mediated bleeding
disorder. The Company is also developing Cyplex(R), platelet alternative,
previously known as Infusible Platelet Membranes ("IPM"), as an alternative to
traditional platelet transfusions.
In January 1998, the Company stopped its Phase III pivotal study of the
Prosorba column for use in the treatment of rheumatoid arthritis ("RA"). The
study was halted based on the recommendation of an independent Data Safety and
Monitoring Board after an analysis of the available data showed that the
Prosorba column had achieved both statistically significant efficacy and
favorable safety results. In May 1998, the FDA notified the Company that its
Premarket Approval Supplement ("PMA") for the Prosorba column in the treatment
of RA had been selected for "Special Review" status. In July 1998, the Company
completed its submission of the PMA to the FDA. The PMA seeks to extend labeling
to include moderate to severe RA on the basis of a pivotal Phase III clinical
trial in RA that was completed in January 1998.
The Company appeared at a hearing before the FDA's Gastroenterology and
Urology Device Advisory Panel (the "FDA Panel") on October 29, 1998. The FDA
Panel recommended on that day to the FDA that the Prosorba column be approved
for the treatment of moderate to severe rheumatoid arthritis, subject to the
requirements that (i) the Company conduct a post-marketing trial to determine
the safety and efficacy of combination treatment with disease-modifying
anti-rheumatic drugs and to evaluate the safety and efficacy of treatment of
rheumatoid arthritis patients with the Prosorba column and (ii) final labeling
of the Prosorba column for the treatment of rheumatoid arthritis be negotiated
by the end of 1998.
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There can be no assurance that the Company will receive regulatory
approval for the Prosorba column or Cyplex, platelet alternative on a timely
basis, if at all. If the Prosorba column is ultimately approved, there can be no
assurance that the Company will be successful in marketing the Prosorba column
for use as a treatment for RA.
2. INVENTORIES
Inventories are comprised of the following:
<TABLE>
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September 30, 1998 December 31, 1997
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Raw materials and components $204,047 $166,714
Work in process 511,370 354,010
Finished goods 126,000 107,280
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$841,417 $628,004
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</TABLE>
3. NET LOSS PER SHARE
The computation of net loss per share is based on the weighted average
number of shares of common stock outstanding for each period. Common stock
equivalents related to options, warrants, convertible debentures and Series A
convertible preferred stock are excluded, as their effect is antidilutive.
At various dates during September 1998, the Company issued shares of
Series A convertible preferred stock whereby each such share is convertible at
any time into common stock on a one-to-one basis at a convertible price of $1.50
per common stock. At each date of issuance, the fair market value of the common
stock was between $1.72 and $2.69 per share. Therefore, each investor received a
beneficial conversion feature between $0.22 and $1.19 per share of common
stock. In accordance with EITF D-60 the Company recorded the aggregate
difference as an "imputed" dividend totaling approximately $2.1 million in the
quarter ended September 30, 1998. (See Note 5 below regarding the closing of the
Series A convertible preferred stock.)
4. BASIC AND DILUTED LOSS PER SHARE
In accordance with Financial Accounting Standards Statement No. 128,
"Earnings Per Share," ("FAS No. 128"), both the basic and diluted loss per
share for the quarter and nine months ended September 30, 1998 and 1997 are
based on the weighted average number of shares of common stock outstanding
during the periods. Since potentially dilutive securities have not been included
in the calculation of the diluted loss per share for both periods as their
affect is antidilutive, there is no difference between the basic and diluted
loss per share.
5. SERIES A CONVERTIBLE PREFERRED STOCK
On September 25, 1998, the Company closed on a private placement of
3,063,561 shares of the Company's Series A convertible preferred stock ("Series
A Stock") priced at $1.50 per share with a small group of accredited investors.
The Company received approximately $4.6 million, less approximately $313,000 in
estimated issuing costs.
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Each share of Series A Stock is initially convertible at any time at
the election of the holder into one share of common stock. However, if the price
per share in the Company's first equity financing following the closing of the
Series A Stock offering in which the Company receives aggregate proceeds of at
least $7.5 million (the "Qualified Subsequent Financing") is less than the then
applicable conversion price, the conversion price shall be adjusted to equal the
price per share paid in the Qualified Subsequent Financing.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131 "Segment Information" ("SFAS 131").
Comprehensive loss is not different from the net loss disclosed on the
consolidated statements of operations. The adoption of SFAS 131 did not affect
the Company's results of operations or financial position, since the Company
operates in a single business segment.
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 21E of the Exchange Act that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed below and
elsewhere in this Quarterly Report. Factors that could cause or contribute to
such differences include, without limitations those discussed in this section as
well as those discussed in the section entailed "Risk Factors" beginning on page
13.
RESULTS OF OPERATIONS
Revenues associated with shipments of the Company's Prosorba column
were approximately $603,000 and $658,000 for the quarters ended September 30,
1998 and 1997, respectively. Due to limited resources, the Company's sales and
marketing team has been focusing on hiring and training additional
representatives in preparation for potential label expansion to include RA. The
Company believes pre-launch planning is important to the overall success of the
Company and that its sales team's experience in sales of the Prosorba column
enables them to perform this key function. The Company believes that the
long-term benefits of the market intelligence gathered in connection with
pre-launch planning activities for the RA market will outweigh any short-term
reduction in revenues during 1998 relative to 1997.
Total costs and expenses were approximately $3.0 million and $9.0
million for the quarter and nine months ended September 30, 1998, respectively,
compared to approximately $3.6 million and $10.1 million for the same periods in
1997. The decrease in expenditures is primarily due to savings associated with
the early completion of the Company's Phase III pivotal study in January 1998,
offset in part by increases in sales and marketing expenses for the 1998
periods.
Production costs were approximately $628,000 and $1.4 million for the
quarter and nine months ended September 30, 1998, respectively, compared to
approximately $354,000 and $1.3 million for the same periods of 1997. The
increase of approximately $274,000 for the quarter ended September 30, 1998
compared to 1997 is a result of an increase in the number of manufacturing
personnel hired to prepare for facilities expansion related to the Company's
preparation for production scale-up and potential product launch requirements.
The Company expects production costs to increase as expansion proceeds and
production demands increase.
Sales and marketing costs for the quarter and nine months ended
September 30, 1998 were approximately $811,000 and $1.6 million, respectively,
up from approximately $263,000 and $1.0 million for the same periods of 1997.
The increase is a result of pre-market research activities conducted in
connection with the potential entry of the Prosorba column into the RA market.
The Company expects increasing sales and marketing expenses resulting from the
addition of personnel in the third quarter of 1998 and anticipated expenses
related to the Company's preparation for entrance into the RA market.
Research and development (R&D) expenses were approximately $825,000 and
$3.5 million for the quarter and nine months ended September 30, 1998,
respectively, down from approximately $1.8 million and $5.4 million for the
corresponding periods of 1997. The decrease in R&D expenses is a direct result
of savings associated with the early conclusion of the Company's RA trial in
January 1998. In January 1998, the Company stopped its Phase III pivotal study
of the Prosorba column for use in the treatment of RA. The study was halted
based on the recommendation of an independent Data Safety and Monitoring Board
after an analysis of the available data showed that the Prosorba column had
achieved both statistically significant efficacy
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and favorable safety results. In May 1998, the FDA notified the Company that its
Premarket Approval Supplement ("PMA") for the Prosorba column in the treatment
of RA had been selected for "Special Review" status. In July 1998, the Company
completed its submission of the PMA with the FDA for the Prosorba column. The
PMA seeks to extend labeling to include severe RA on the basis of a pivotal
Phase III clinical trial in RA that was completed in January 1998.
The Company appeared at a hearing before the FDA's Gastroenterology and
Urology Device Advisory Panel (the "FDA Panel") on October 29, 1998. The FDA
Panel recommended on that day to the FDA that the Prosorba column be approved
for the treatment of moderate to severe RA, subject to the requirements that (i)
the Company conduct a post-marketing trial to determine the safety and efficacy
of combination treatment with disease-modifying anti-rheumatic drugs and to
evaluate the safety and efficacy of treatment of rheumatoid arthritis patients
with the Prosorba column and (ii) final labeling of the Prosorba column for the
treatment of rheumatoid arthritis be negotiated by the end of 1998.
There can be no assurance that FDA approval of the Company's PMA
Supplement will be received and even if FDA approval is received, there can be
no assurance that the Company will be successful in marketing the Prosorba
column for the treatment of RA. Any such failure to receive FDA approval or
successfully market the Prosorba column for use in the treatment of RA could
have a material adverse effect on the Company's business.
General and administrative expenses were approximately $719,000 and
$2.5 million for the quarter and nine months ended September 30, 1998, compared
to approximately $1.1 million and $2.3 million for the corresponding periods of
1997. The decrease for the quarter of approximately $376,000 is primarily a
result of non-recurring expenses incurred in the third quarter of 1997. The
increase of approximately $238,000 incurred during the nine months ended
September 30, 1998, compared to the same period in 1997, is primarily a result
of an increase in personnel and professional services incurred, as well as costs
related to the Company's Annual Meeting, which was held in June rather than
October as in the previous year.
For the quarter ended September 30, 1997, the Company recorded a net
loss applicable to common shareholders of approximately $4.4 million, or $0.11
per share, compared to a net loss of approximately $2.7 million, or $0.08 per
share, for the same period in 1997. For the nine months ended September 30,
1998, the net loss applicable to common shareholders was approximately $9.0
million, or $0.23 per share, compared to a loss of approximately $7.4 million,
or $0.21 per share, for the same period in 1997. Included in the net loss for
the quarter and nine months ended September 30, 1998 was a $2.1 million
undeclared, imputed dividend related to the beneficial conversion of the
Company's Series A convertible preferred stock issuance in September 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of September 30, 1998 was
approximately $7.4 million compared to approximately $7.9 million at December
31, 1997. The decrease of approximately $523,000 in working capital is
attributable to cash used in funding the Company's day to day operations and
conducting clinical trials, partially offset by cash proceeds received from the
issuance of Series A convertible preferred stock and the exercise of options and
warrants.
The Company expects to incur operating losses until it obtains
marketing approval from the FDA and successfully markets the Prosorba column for
RA or until it obtains FDA approval for and successfully commercializes Cyplex,
platelet alternative. There can be no assurance that the Company will be able to
obtain FDA approval to market the Prosorba column for disease indications other
than ITP and, if it does, whether the Company will be able to successfully
market the Prosorba column for such indications, or obtain FDA approval for, or
be able to successfully commercialize, Cyplex, platelet alternative.
10
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The Company expects that existing cash resources will be sufficient to
fund its activities through launch of the Prosorba column for RA, pending FDA
approval.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
Year 2000. This could result in a system failure or a miscalculation causing
disruption of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace significant portions of its software so that those
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications or replacements of existing software,
the Year 2000 Issue can be mitigated. However, if such modifications and
replacements are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing and implementation. The
Company has completed an assessment of the impact of the Year 2000 Issue on its
internal and external operations, and has determined that it will be required to
upgrade certain software programs it employs in the normal course of business,
including its accounting application software and certain other administrative
software. The total cost of the Year 2000 Issue project is estimated to be less
than $50,000 and is estimated to be completed no later than December 31, 1998.
The Company expects to mitigate the Year 2000 Issue so that the Company's
operations or business are not materially adversely effected. However, there can
be no assurance that the systems of other companies on which the Company's
systems rely will be timely converted and will not have an adverse effect on the
Company's systems.
The cost of the Year 2000 Issue project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 Issue. The Company plans to
evaluate the status of completion in December 1998 and determine whether such a
plan is necessary.
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RISK FACTORS
In addition to those risks identified elsewhere in this Quarterly
Report on Form 10Q, the following risk factors may affect our business,
including, future operating results and financial performance.
OUR NEED FOR ADDITIONAL CAPITAL
We are actively seeking opportunities to raise additional capital to be
used primarily to fund the proposed commercial launch of the Prosorba column for
the rheumatoid arthritis indication, to develop new and complete existing
research, and to further the development and marketing of Cyplex, platelet
alternative. We may need to raise additional capital to complete the launch of
the Prosorba column for the rheumatoid arthritis indication, if approved. In
addition, if we decide to continue the development of products other than the
Prosorba column and Cyplex, platelet alternative, we will be required to raise
additional capital. The amount of capital we will require is difficult to
predict, and we cannot assure you that we will be able to raise any additional
capital from any source. If we are unable to obtain additional financing, we may
have to delay or scale back the launch of the Prosorba column for the rheumatoid
arthritis indication, if approved, and delay, scale back or eliminate some or
all of our research and development activities. In addition, we may be required
to license to third parties technologies that we would otherwise seek to develop
ourselves, to seek financing at potentially higher costs to us or to seek
additional methods of financing. These results may have a detrimental effect on
our financial condition and could prevent us from realizing our long-term goals.
OUR HISTORY OF OPERATING LOSSES
We are operating at a loss and have been operating at a loss since our
formation in October 1981. As of September 30, 1998, we had an accumulated
deficit of approximately $77.8 million. Our ability to become profitable is
dependent upon our obtaining FDA marketing approval of the Prosorba column in
rheumatoid arthritis and disease indications other than ITP in a timely manner,
and successfully increasing the sales of Prosorba column. If we do not receive
marketing approval from the FDA for the Prosorba column for the treatment of
rheumatoid arthritis, or for Cyplex, platelet alternative, for the treatment of
platelet disorders, we will have to significantly scale back our plans, curtail
clinical trials, and limit our present operations in order to become profitable
or operate on a break-even basis.
PENDING FDA DECISION ON OUR PRE-MARKET APPROVAL APPLICATION
Our only FDA-approved product is the Prosorba column, which the FDA
approved in 1987 for use by patients with ITP. However, sales of the Prosorba
column for use by patients with ITP have declined over the last two years. We
are currently focused on obtaining FDA approval to market the Prosorba column
for the treatment of rheumatoid arthritis. We filed our PMA with the FDA in July
1998 to allow us to market the Prosorba column for use in the treatment of
rheumatoid arthritis. The Company appeared at a hearing before the FDA Panel on
October 29, 1998. The FDA Panel recommended on that day to the FDA that the
Prosorba column be approved for the treatment of moderate to severe rheumatoid
arthritis, subject to the requirements that (i) we conduct a post-marketing
trial to determine the safety and efficacy of combination treatment with
disease-modifying anti-rheumatic drugs and to evaluate the safety and efficacy
of treatment of rheumatoid arthritis patients with the Prosorba column and (ii)
final labeling of the Prosorba column for the treatment of rheumatoid arthritis
be negotiated by the end of 1998. However, we cannot assure you
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<PAGE> 13
that the FDA will follow the FDA Panel's recommendation and if the PMA
Application is not approved and the Prosorba column is restricted to the
treatment of ITP, the Company will be required to significantly scale back its
plans and limit its present operations and may not otherwise be viable as an
independent entity.
OUR SALES FORCE
We have a small domestic sales force that sells the Prosorba column
directly to customers for use in the treatment of ITP. To date, our sales force
has made commercial sales of the Prosorba column only for use in the treatment
of ITP. Our sales force has had no experience in marketing the Prosorba column
for use in the treatment of disease indications other than ITP. Accordingly, if
we receive FDA approval to use the Prosorba column for the treatment of
rheumatoid arthritis or any other disease indications other than ITP, our sales
force may not be able to successfully market the Prosorba column for such uses.
Any failure by our sales force to successfully market the Prosorba column for
rheumatoid arthritis, if approved, will have a material adverse effect on our
overall financial performance.
COMPETITIVE ENVIRONMENT
The health care field in general and the particular areas in which we
market our products are extremely competitive. In developing and marketing
medical devices to treat immune-mediated diseases, we compete with other
products, therapeutic techniques and treatments offered by national and
international healthcare and pharmaceutical companies, many of which have
greater marketing, human and financial resources than we do. In addition, we
expect to compete with new products and therapeutic techniques and treatments
that are in various stages of clinical development, some of which are expected
to ultimately receive FDA approval.
The immunological therapy market is characterized by rapid
technological change and potential introductions of new products or therapies.
To respond to these changes, we may be required to develop or purchase new
products to protect our technology from obsolescence. We may not be able to
develop or obtain such products. Even if we develop or obtain new products, such
products may not be commercially viable. In addition, we cannot assure you that
our Prosorba column will prove effective in the treatment of rheumatoid
arthritis or that Cyplex, platelet alternative, if approved for sale by the FDA,
will be an effective alternative to traditional platelet therapy. If the
Prosorba column fails to be effective in the treatment of rheumatoid arthritis
or if Cyplex, platelet alternative, fails to be an effective alternative to
traditional platelet therapy, our entire business will be materially adversely
affected.
UNCERTAINTY OF OUR PATENT PROTECTION
As a policy, we seek to protect our proprietary technology and inventions
which are used in the Prosorba column and Cyplex, platelet alternative, through
patents, trade secret law and other legal protections. We may, however, incur
significant expense in protecting our intellectual property and defending or
assessing claims with respect to intellectual property owned by others. Any
patent or other infringement litigation by or against us could result in
significant expense to us and diversion of our management resources, which in
turn could have an adverse effect on our financial performance. The process used
in manufacturing the Prosorba column is covered by one of various patents that
we hold; however, we cannot assure you that this patent will afford significant
protection of our proprietary technology. We also could be forced to modify or
abandon the Prosorba column or Cyplex, platelet alternative, based upon our
assessment of intellectual property risks or actual or threatened claims by
others. Since the Prosorba column is our only FDA-
13
<PAGE> 14
approved product, our entire business will be materially adversely affected if
we are unable to sell that product.
Others have filed applications for, or have been issued, patents and
may obtain additional patents and other proprietary rights competing with our
products or processes. Although we do not presently know the scope and validity
of these patents, if existing or future patents are upheld as valid by courts,
we may be required to obtain licenses to use technology covered by these
patents.
CONCENTRATION OF OUR OWNERSHIP
As of October 31, 1998, Paramount Capital, Inc., through its
affiliates, beneficially owns 19.9% of our outstanding common stock and Allen &
Company Incorporated beneficially owned approximately 14.8% of our outstanding
common stock. Individually or collectively, Paramount Capital, Inc. and Allen &
Company Incorporated may be able to exert substantial influence over the outcome
of matters requiring stockholder approval.
INSURANCE REIMBURSEMENT
Successful commercialization of a new medical product, such as the
Prosorba column or Cyplex, platelet alternative, depends on reimbursement by
public and private health insurers to health care providers for use of such
products. Such reimbursement may not be available due to a variety of factors,
many of which could affect us as we commercialize use of the Prosorba column for
rheumatoid arthritis and continue the development and commercialization of
Cyplex, platelet alternative. We have generally been successful in assisting
health care providers in arranging reimbursement for the use of the Prosorba
column in the treatment of ITP. We cannot assure you, however, that public and
private insurers will continue to reimburse us for the use of the Prosorba
column in the treatment of ITP or in the treatment of any other disease
indications approved by the FDA. In addition, we do not know whether health care
providers will reimburse us for the use of Cyplex, platelet alternative.
PRODUCT LIABILITY FOR OUR PRODUCTS
The use of the Prosorba column and, if approved for use by the FDA,
Cyplex, platelet alternative, may result in adverse side effects to the
end-users that could expose us to product liability claims. We currently hold
product liability insurance of $15 million, which we believe is adequate in
light of our business. However, we cannot predict all the possible harms or side
effects that may result from treatment of patients with our products and
therefore, we cannot assure you that the amount of coverage we currently hold
will be adequate to protect us. We also cannot assure you that we will have
sufficient resources to pay any liability resulting from such a claim beyond our
insurance coverage.
POSSIBLE VOLATILITY OF OUR STOCK PRICE
Like other smaller-capitalization technology companies, our stock price has
fluctuated significantly at times and is subject to a risk of ongoing
volatility. The price of our shares may be adversely affected by our financial
performance or the performance of our competitors, the market for technology
company stocks, the market for small cap company stocks, general economic trends
or other factors that we cannot predict or control.
In addition, in connection with our acquisition of PRP, Inc. in November
1996, we must make a $5 million milestone payment to the former holders of
equity securities of PRP, Inc. when there is a
14
<PAGE> 15
public announcement of an FDA approval letter relating to the use of Cyplex,
platelet alternative, for the treatment of thrombocytopenia. We have the option
to make that payment in cash or shares of our common stock. If we decide to make
that payment in cash, a cash payment of $5 million might have a material adverse
effect on our financial condition. If we decide to make that payment in common
stock, the issuance of additional shares of common stock with a value of $5
million might have a significant impact on the market price of our common stock.
15
<PAGE> 16
PART II
Item 1 - Legal Proceedings
Reference is made to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
Item 2 - Change in Securities and Use of Proceeds
(b) In September 1998, the Company designated 3,333,333 shares of the
Company's authorized preferred stock as Series A convertible
preferred stock, having liquidation preferences superior to the
Company's shares of common stock.
(c) In September 1998, the Company completed a private placement of
3,063,561 shares of the Company's Series A convertible preferred
stock (the "Preferred Shares") at a price of $1.50 per share for
an aggregate offering price of $4,595,341. Net proceeds (after
deducting placement fees of approximately $113,000, and other
related issuing costs of approximately $200,000) to the Company
were $4,282,341. Each of the purchasers of the Preferred Shares
was an "accredited investor" within the meaning of rule 501(a)
promulgated under the Securities Act. The Company relied on the
exemption provided by Section 4(2) under the Act.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cypress Bioscience, Inc.
November 13, 1998 /s/ Jay D. Kranzler
- ------------------------------- ------------------------------------
Date Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer, Chief
Scientific Officer and Chairman of
the Board
(Principal Executive Officer and
Principal Financial Officer)
17
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